Global Daily – Greek talks edging forward

by: Nick Kounis , Maritza Cabezas

Global-Daily-Insight-23-April-2015.pdf ()
  • Various officials suggest Greek talks are progressing but that a deal is not close…
  • …end of June is the official deadline, but the Greek government only has cash to May
  • Strong US housing demand to boost residential investment in the coming time

Greek deal: progress but not close

The political rhetoric around Greece is heated and unhelpful  comments are coming from various officials on all sides. Negotiations are going on behind closed doors and it is difficult to know exactly what is going on. In this environment voices warning of a default and Grexit have reached fever pitch. However, those directly  involved are sending a more sober message. Over recent days, Eurogroup Chair Dijsselbloem, the head of the IMF’s European Department Thomsen, ECB Board member Coeure and Greek finance minister Varoufakis have given updates on the talks. The message is clear. Progress is being made, but the two sides are still far apart. Two questions arise: will they reach a deal and if so when.

 Deal still likely eventually

Our base case is that Greece and the EU will reach an agreement eventually. Despite all the rumours that Greece is aiming for a default or exit, that does not appear to actually be the case. Mr Coeure reported that ‘the spirit on both sides was extremely positive’ during last week’s talks in Brussels. Meanwhile, late on Tuesday Mr Varoufakis told reporters that ‘neither they nor we will let the opportunity slip to arrive at an agreement that’s clearly to the benefit of everyone.’ He added that a failure to reach a deal would be ‘ catastrophic’.

 When? …before the cash runs out!?

There were earlier hopes that a deal could be reached at the Eurogroup in Riga on Friday, but that now looks out of the question. An EU official said that Greece was now also unlikely to meet a 30 April deadline to submit the concrete reform plan that would unlock aid. The official said that the eurozone now sees the end of June as the main deadline for the deal, according to Bloomberg News. Greece is facing severe liquidity pressures and we have serious doubts about whether the country could stick it out for that long without aid. The Greek government has ordered local governments to transfer their cash reserves to the central bank, which amount to around EUR 2bn. This should allow the government to meet its commitments through to the end of May. It therefore seems that this is the ‘real’ deadline for a deal, especially with commercial banks also continuing to face a liquidity crunch.

23 Apr

Strong US housing demand in March…

There are signs that US housing demand is on a firmer footing. Yesterday’s existing home sales data showed strong growth, as sales increased by 6.1% in March up from 1.5% the previous month. This increasing demand for homes has put further downward pressure on the stock of existing homes (now at 4.6 months). As a result of these lower inventories, house prices have been increasing steadily. One of the measures, the FHFA house price index released yesterday showed home prices increasing by 0.7% in February up from a 0.3% gain in January.

 …should boost residential investment

This should support housing construction in the coming time. Indeed, the most recent homebuilder survey picked up to 56 in April from 52 the previous month. But the start of the year was weak for housing construction, partly as a result of the harsh winter weather. Indeed, housing permits were disappointing  in the first quarter. In March permits declined by 5.7%, down from 3% the previous month. The current recovery in the housing market is slow, but it is moving in the right direction. Forward looking indicators including the latest loan officer survey, suggest that mortgage lending standards are easing. On top of this, we think that a strong labour market will support housing demand in the next few quarters.